DIRTY MONEY

 

A probe by BuzzFeed News and the International Consortium of Investigative Journalists (ICIJ) had concluded that potentially dubious transfers worth about US$2.0 trillion took place at a host of banks between 1999 and 2017. Profits from deadly drug wars, fortunes embezzled from developing nations, and Ponzi scheme proceeds were permitted to flow through the institutions, according to the allegations. Five institutions – JPMorgan Chase, HSBC, Standard Chartered, Deutsche Bank, and Bank of New York Mellon – were accused by the probe of continuing to move assets of alleged criminals, even after being fined for earlier failures to stem the flows.

The report showed that money-laundering measures that rely on the goodwill of banks are very naive. A potential solution is to sanction more banks and stop being naive enough to think that the obligation to report suspicious transactions will work. The investigation was led by more than 100 international media outlets from 88 different countries and is based on over 2,000 suspicious activity reports (SARs) submitted to the US Treasury Department’s financial law enforcement agency, FinCEN, by banks.

The system had allowed dirty funds to circulate even if there are very strong suspicions of corruption and money laundering - whether it is in Europe, the United States, or elsewhere. Many of the SARs filings had not sparked any further action by the banks or regulatory authorities. Issuing SARs should not be the end of the process. It should be the beginning. The banks named in the report usually insisted they were stepping up efforts to combat financial crime, sharpening safeguards, and working with regulators to that end.

Authorities, however, often lack the means to deal with such vast flows of dirty money and prosecutions are rare, while commentators argue that the punishment does not match the potential reward from funneling dubious funds. The punishment does not outweigh the profit. We are not seeing many banks being prosecuted for money laundering. It sends a signal that you can get away with it.

Every country must build effective institutions while enforcing good governance, transparency, and accountability. They must fight corruption, combat organized crime, and implement effective tax systems, which is even more critical in resource-rich countries. The events in the Middle East, Malaysia, and Ukraine demonstrate how the capture of state coffers by vested interests undermines the people’s trust in the government.

But corruption, money laundering, and tax evasion are global problems, not just challenges for developing countries. Though weak national institutions and limited law-enforcement capacity may make it easier to initiate illicit financial transfers, we need to acknowledge that dirty money often ends up in financial centres, which have become quasi-enablers. That is why addressing the issue requires international cooperation.

The regulations that identify the true owners of illicit funds need to be enforced. Once such assets are parked in opaque companies, they are often beyond the reach of tax authorities and investigators. Time and again, the true recipients or beneficial owners of companies and trusts are shielded from disclosure by laws and regulations that inadvertently protect criminals. This must stop.

A system for the automatic exchange of tax information among countries would limit the places where tax evaders and money launderers can easily hide their proceeds. Almost 90 countries have now begun cross-border data exchanges that would include information about account holders and certain details regarding their deposits and balances – information that could help authorities identify proceeds from corruption and illegal transactions through suspicious activity and spikes.

More action is needed this year and beyond. The World Bank is already working with its clients in developing countries to improve their governance systems, collect taxes, fight corruption, and recover stolen assets. Its work will benefit enormously from the current push for more international cooperation in curbing illicit financial flows.

Changing much-cherished bank-secrecy laws is worth the effort. Corruption, tax evasion, and the capture of natural-resource revenues undermine the rule of law, weaken the social fabric, erode citizens’ trust in institutions, fuel conflict, and insecurity, and hamper job creation. They are not just illegal, but also immoral, because they keep poor people poor.

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